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Microeconomics is one of the major fields of the social science of economics that reflects on the behavior of firms, individual consumers as well as industries. It studies how people, households and companies make decisions to the allocation of limited resources, normally in markets where products are bought and sold. It examines how such decisions and behaviors influence the demand and supply of goods and services which consequently determines the price of the products. It also analyzes the market failure and explains the theoretical situations that are required for appropriate competition.
There are two fundamentals of microeconomics and which include basic supply and demand. The two ideas that make macroeconomics credible is the notion that people always assign value to things and they make choices based on those values. Since human wants are unlimited and the resources are scarce, microeconomics comes in to educate people on how to make the very best use of these limited resources. This is what is referred to as the productive efficiency.
Why microeconomics is worth studying
One of these reasons is that it helps in examination of distribution of income amid the populace. It also facilitates analyzing how technology and society’s institutions affect price, investigate behavior of financial markets, study the trends of trade internationally, explore the business cycles and how monetary rules influence inflation and unemployment, and finally study how the governmental policies influence price stability, economic growth and efficient utilization of resources.
The difference between macroeconomics and microeconomics is that macroeconomics is concerned with the economy as a whole, a wide phenomena involving inflation, unemployment as well as economic growth while microeconomics explore on the individual parts of the economy. While firms are the source of products and hire factors needed for production, households provide market for the processed goods and services as well as provide factors of products required by the firms. The prices of products regulate the decision of consumers and producers in the market. While higher prices reduce consumers in the market, lower prices increase them and discourage the consumption rate. For production to be possible land, labor and capital must be available (Dircks, 2011).
A market economy is one that private firms and individuals make decisions concerning production and consumption. In such an economy, individuals make decisions for themselves. Command economy on the other hand is controlled by the government and it makes all the decisions regarding production as well as distribution. Mixed economies are composed of elements of command and market. Production-possibility frontier is used to determine the maximum production that can be obtained by a particular economy given its technological knowhow as well as the input available. Opportunity cost is another term used to refer to the value of a good or service forgone.
One of the major determinants of demand is the average income of the buyers within the society. As people’s income rise, they provide improved market for goods and services. A second determinant of demand is the market size. The number of populace will obviously affect the demand of a given market. The other factors are the cost and availability of the desired products, tastes and season. The demand of air conditioners definitely rises during the hot seasons.
Supply schedule is a tool used to show the relationship between its market cost and the amount of the commodity. The factors that determine the supply curve include cost of production, price of input, technological advancement, price of related goods, government policy, and especial influences. Market equilibrium is yet another microeconomic term used to refer to the state at which the cost at which customers want to buy a product is exactly equals the amount the seller wants to sell (Dircks, 2011).
Supply, demand and product
Price elasticity determines how much amount of demanded goods adjusts when its price has changed. Elasticity normally increase when substitutes are available, products are luxuries and when customers have ample time to adjust their behavior. There are basically three types of demand namely the price elastic, price-inelastic and unit elastic demand. When demand is price-inelastic, a price decrease reduce total revenue, when it is price-elastic, a price decrease increases total revenue and when it is unit-elastic demand, price decrease leads to zero change in the absolute revenue.
These are all the activities involved in acquisition, consuming and disposing of products. The buyers’ choices are determined by various alternatives namely preferences, income or budget, and cost of the goods purchased. There are two major models of consumer behavior and which are the indifference approach and marginal utility approach.